Ross Stitt compares and contrasts the different monetary policy approaches between the Australian and New Zealand central banks, with the Aussies less certain they have inflation under control

Two weeks and two very different pronouncements from either side of the Tasman.

On Wednesday, more than four years since it last reduced the Official Cash Rate, the Reserve Bank of New Zealand cut the rate from 5.50% to 5.25%. Why now? According to the RBNZ, inflation is now ‘returning to within the Monetary Policy Committee’s 1% to 3% target band’.

Crucially, economic growth is below trend. Indeed, RBNZ figures indicate that New Zealand is back in recession.

No doubt MPC members are alert to the danger that delaying rate cuts too long would expose them to future accusations of exacerbating the country’s economic woes.

Significantly, the RBNZ signaled that there are more rate cuts ahead. Its Monetary Policy Outlook suggests the OCR will fall to 5% by the end of the year and to 4.5% by mid-2025.

That projection sits in stark contrast to the message delivered a week earlier by the Reserve Bank of Australia. In its latest Monetary Policy Decision, the board of the RBA left the cash rate at 4.35%, where it’s been since November 2023. The board does not see inflation returning to its target range of 2% to 3% until ‘late in 2025’.

Even more ominous for Australian borrowers were the comments made to the media by the RBA governor, Michele Bullock. She explained that the board had considered a rate rise at its meeting and stressed  that the board ‘will, if needed, increase interest rates’. For the avoidance of doubt, Bullock told reporters that ‘a near-term reduction doesn’t align with the board’s current thinking’.

So why is Governor Bullock contemplating rate increases when Governor Orr has started down the path of rate cuts?

For a start, Australia’s cash rate at 4.35% is still materially lower than NZ’s at 5.25%. Back in 2020, the RBNZ was quicker to lift rates than the RBA and went much further.

The RBA has been criticised by many commentators for not lifting rates far enough to tame inflation. In comparable countries like NZ, the UK, the US, and Canada the cash rate peaked at over 5%. Now that those countries have started dropping rates, the RBA risks appearing even more of an outlier.

History aside, the RBA board’s current concern is excess demand in the Australian economy. According to Governor Bullock, that’s due to ‘stronger forecast public spending and an expected pick-up in household consumption’.

The Governor’s views on the inflationary impact of public spending have proved controversial. They were immediately challenged by the Federal Treasurer, Jim Chalmers. He doesn’t want the government’s fiscal policy to be seen as an obstacle to the RBA cutting rates. Unfortunately for him many economists quickly backed up the RBA’s views. They identified public spending, particularly at the state level, as detrimental in the fight against inflation.

The Queensland government is the worst offender. With an election due in October, it’s showering the electorate with handouts – $1,000 off energy bills, 20% of car registration fees, a 50 cent flat rate fare on public transport, $200 per child to offset ‘the rising cost of junior sport’. Under the auspices of providing cost-of-living relief, the government is effectively buying votes.

And hampering the RBA’s task of suppressing inflation.

By comparison, the RBNZ expects the net impact of the kiwi government’s fiscal policy to be small.

Another concern for the RBA is the labour market. While there is evidence of some easing, the market is still tight according to the bank. This view was validated on Thursday with the release of the latest labour force figures from the Australian Bureau of Statistics. In something of a surprise, full-time employment increased by more than 60,000 in July. Unemployment ticked up to 4.2% but that was due to an increase in the participation rate.

Such an impressive increase in full-time jobs is seen by many as justifying the RBA’s decision to keep rates on hold. It confirms the bank’s view that the task of rate setting in the current environment is bedeviled by uncertainty.       

It was against this backdrop that the RBA Deputy Governor, Andrew Hauser, a recent import from the UK, gave a fascinating speech last week on the art of monetary policymaking. It’s a must read for anyone interested in reserve banks.

Entitled ‘Beware false prophets’, Hauser’s speech makes it very clear he views interest rate setting as an art not a science. He bemoans ‘the extraordinary certainty with which individual views about the outlook for the economy and the path of monetary policy can sometimes be expressed’. With a hint of regret, he endorses the view expressed by another British economist nearly a century ago that in Australia ‘economics ranks next after cricket as a topic of public interest’. 

Hauser insists that reserve banks cannot provide markets with certainty about the trajectory of an economy, or the policy strategy required to maintain inflation within target. He issues a strong warning against overconfidence on the part of policymakers. To avoid that, he advises ‘communicating clearly and openly about what we don’t know, as well as what we do’. Significantly, he also recommends ‘forming contingent hypotheses about the future – rather than overly precise point forecasts’.

In that regard, it's interesting that the RBNZ’s Monetary Policy Outlook projects movements in the OCR out to 2026. The RBA is less forthcoming.

Hauser is no doubt aware of the unfortunate forward guidance the previous RBA Governor Philip Lowe provided to borrowers and would-be borrowers during the pandemic – he said he didn’t expect rates to begin rising until 2024. As it turned out, they soared from 0.1% to 4.35% during 2022-23.

The RBA won’t make that mistake again.

*Ross Stitt is a freelance writer with a PhD in political science. He is a New Zealander based in Sydney. His articles are part of our 'Understanding Australia' series.